SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number: 0-18417
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3516796
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(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
One New York Plaza, 14th Floor, New York, New York
10292
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 778-7866
N/A
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Former name, former address and former fiscal year, if changed since last report
Indicate by check CK whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _CK_ No __
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, December 31,
1997 1996
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ASSETS
Equity in commodity trading accounts:
Cash $ 4,233,945 $ 4,416,242
U.S. Treasury bills, at amortized cost 13,951,345 13,869,729
Net unrealized gain on open commodity positions 50,693 417,876
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Total assets $18,235,983 $18,703,847
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 690,151 $ 664,958
Management fees payable 60,453 62,075
Accrued expenses 60,672 61,858
Due to affiliates 39,528 19,472
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Total liabilities 850,804 808,363
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Commitments
Partners' capital
Limited partners (124,365 and 129,302 units outstanding) 17,211,220 17,716,405
General partner (1,257 and 1,307 units outstanding) 173,959 179,079
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Total partners' capital 17,385,179 17,895,484
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Total liabilities and partners' capital $18,235,983 $18,703,847
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Net asset value per limited and general partnership unit ('Units') $ 138.39 $ 137.02
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The accompanying notes are an integral part of these statements
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
------------------------
1997 1996
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REVENUES
Net realized gain (loss) $1,294,990 $ (49,610)
Change in net unrealized gain (702,758) (343,492)
Interest from U.S. Treasury bills 175,214 194,865
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767,446 (198,237)
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EXPENSES
Commissions 363,494 393,649
Management fees 182,957 194,694
General and administrative 41,149 47,332
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587,600 635,675
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Net income (loss) $ 179,846 $(833,912)
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ALLOCATION OF NET INCOME (LOSS)
Limited partners $ 178,046 $(801,369)
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---------- ---------
General partner $ 1,800 $ (32,543)
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NET INCOME (LOSS) PER WEIGHTED AVERAGE
LIMITED AND GENERAL PARTNERSHIP UNIT
Net income (loss) per weighted average
limited and general partnership unit $ 1.38 $ (5.36)
---------- ---------
---------- ---------
Weighted average number of
limited and general partnership units outstanding 130,609 155,448
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STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
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Partners' capital--December 31, 1996 130,609 $17,716,405 $179,079 $17,895,484
Net income 178,046 1,800 179,846
Redemptions (4,987) (683,231) (6,920) (690,151)
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Partners' capital--March 31, 1997 125,622 $17,211,220 $173,959 $17,385,179
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The accompanying notes are an integral part of these statements
3
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of Prudential-Bache Capital Return Futures Fund L.P. (the
'Partnership') as of March 31, 1997 and the results of its operations for the
three months ended March 31, 1997 and 1996. However, the operating results for
the interim periods may not be indicative of the results expected for a full
year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission for the year ended December 31, 1996 (the 'Annual Report').
Certain balances from the prior period have been reclassified to conform with
the current financial statement presentation.
B. Related Parties
Seaport Futures Management, Inc. (the 'General Partner') and its affiliates
perform services for the Partnership which include, but are not limited to:
brokerage services, accounting and financial management, registrar, transfer and
assignment functions, investor communications, printing and other administrative
services.
The costs incurred for these services for the three months ended March 31,
1997 and 1996 were:
1997 1996
-------------------------------------------------------------------------------
Commissions $363,494 $393,649
General and administrative 23,021 25,503
-------- --------
$386,515 $419,152
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The Partnership maintains its trading and cash accounts at Prudential
Securities Incorporated ('PSI'), the Partnership's commodity broker and an
affiliate of the General Partner. Approximately 75% of the Partnership's net
asset value invested is in interest-bearing U.S. Government obligations
(primarily U.S. Treasury bills), a significant portion of which is utilized for
margin purposes for the Partnership's commodity trading activities. As described
in the Annual Report, all commissions for brokerage services are paid to PSI.
In connection with the Partnership's interbank transactions, PSI engages in
foreign currency forward transactions with the Partnership and an affiliate of
PSI who, as principal, attempts to earn a profit on the bid-ask spreads (which
must be competitive) on any foreign currency forward transactions entered into
between the Partnership and PSI, on the one hand, and PSI and such affiliate on
the other. In connection with its trading of foreign currencies in the interbank
market, PSI may arrange bank lines of credit at major international banks. To
the extent such lines of credit are arranged, PSI does not charge the
Partnership for maintaining such lines of credit, but requires margin deposits
with respect to forward contract transactions.
C. Credit and Market Risk
Since the Partnership's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk).
Futures, forward and options contracts involve varying degrees of off-balance
sheet risk; and changes in the level of volatility of interest rates, foreign
currency exchange rates or the market values of the contracts (or commodities
underlying the contracts) frequently result in changes in the Partnership's
unrealized gain (loss) on open commodity positions reflected on the statements
of financial condition. The Partnership's
4
exposure to market risk is influenced by a number of factors including the
relationships among the contracts held by the Partnership as well as the
liquidity of the markets in which the contracts are traded.
Futures and options contracts are traded on organized exchanges and are thus
distinguished from forward contracts which are entered into privately by the
parties. The credit risks associated with futures and options contracts are
typically perceived to be less than those associated with forward contracts,
because exchanges typically provide clearinghouse arrangements in which the
collective credit (subject to certain limitations) of the members of the
exchanges is pledged to support the financial integrity of the exchange. On the
other hand, the Partnership must rely solely on the credit of its broker (PSI)
with respect to forward transactions. The Partnership presents unrealized gains
and losses on open forward positions as a net amount in the statements of
financial condition because it has a master netting agreement with PSI.
The General Partner attempts to minimize both credit and market risks by
requiring the Partnership's trading manager to abide by various trading
limitations and policies. The General Partner monitors compliance with these
trading limitations and policies which include, but are not limited to,
executing and clearing all trades with creditworthy counterparties (currently,
PSI is the sole counterparty or broker); limiting the amount of margin or
premium required for any one commodity or all commodities combined; and
generally limiting transactions to contracts which are traded in sufficient
volume to permit the taking and liquidating of positions. The General Partner
may impose additional restrictions (through modifications of such trading
limitations and policies) upon the trading activities of the trading manager as
it, in good faith, deems to be in the best interests of the Partnership.
PSI, when acting as the Partnership's futures commission merchant in
accepting orders for the purchase or sale of domestic futures and options
contracts, is required by Commodity Futures Trading Commission ('CFTC')
regulations to separately account for and segregate as belonging to the
Partnership all assets of the Partnership relating to domestic futures and
options trading and is not to commingle such assets with other assets of PSI. At
March 31, 1997 and December 31, 1996, such segregated assets totalled
$16,926,667 and $17,277,553, respectively. Part 30.7 of the CFTC regulations
also requires PSI to secure assets of the Partnership related to foreign futures
and options trading which totalled $1,342,858 and $1,148,057 at March 31, 1997
and December 31, 1996, respectively. There are no segregation requirements for
assets related to forward trading.
As of March 31, 1997 and December 31, 1996, the Partnership's open forward
contracts mature within three months, but open futures contracts mature within
one year.
At March 31, 1997 and December 31, 1996, gross contract amounts of open
futures and forward contracts are:
March 31, December 31,
1997 1996
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Currency Forward Contracts:
Commitments to purchase $ 4,775,496 $14,780,831
Commitments to sell $19,326,989 $21,404,866
Currency Futures Contracts:
Commitments to purchase $ 1,170,185 $ 1,527,963
Commitments to sell $ 1,707,763 $ 2,058,838
Financial Futures Contracts:
Commitments to purchase $ 7,874,702 $37,638,257
Commitments to sell $62,586,215 $ 8,448,337
Other Futures Contracts:
Commitments to purchase $ 2,338,167 $ 419,159
Commitments to sell $ 2,499,201 $ 2,628,405
The gross contract amounts represent the Partnership's potential involvement
in a particular class of financial instrument (if it were to take or make
delivery on an underlying futures or forward contract). The gross contract
amounts significantly exceed the future cash requirements as the Partnership
intends to close out open positions prior to settlement and thus is generally
subject only to the risk of loss arising from the change in the value of the
contracts. As such, the Partnership considers the 'fair value' of its futures
and forward contracts to be the net unrealized gain or loss on the contracts.
Thus, the amount at risk
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associated with counterparty nonperformance of all contracts is the net
unrealized gain included in the statements of financial condition. The market
risk associated with the Partnership's commitments to purchase commodities is
limited to the gross contract amounts involved, while the market risk associated
with its commitments to sell is unlimited since the Partnership's potential
involvement is to make delivery of an underlying commodity at the contract
price; therefore, it must repurchase the contract at prevailing market prices.
At March 31, 1997 and December 31, 1996, the fair value of futures and
forward contracts were:
March 31, 1997 December 31, 1996
------------------------ ------------------------
Fair Value Fair Value
------------------------ ------------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 68,194 $ 163 $ 13,200 $ 13,625
Currencies 13,948 11,550 74,723 175
Other 13,158 9,144 80,797 1,456
Foreign exchanges
Financial 31,632 21,840 129,424 143,249
Forward Contracts:
Currencies 140,353 173,895 522,582 244,345
-------- ----------- -------- -----------
$267,285 $ 216,592 $820,726 $ 402,850
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The following table presents the average fair value of futures and forward
contracts during the three months ended March 31, 1997 and 1996, respectively.
Three months ended Three months ended
March 31, 1997 March 31, 1996
-------------------------- --------------------------
Average Fair Value Average Fair Value
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 21,778 $ 6,658 $ 132,460 $ 1,188
Currencies 73,877 8,835 82,499 13,310
Other 71,514 3,765 27,654 19,086
Foreign exchanges
Financial 123,598 48,846 342,470 31,757
Forward Contracts:
Currencies 772,282 302,042 497,556 428,024
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$1,063,049 $ 370,146 $1,082,639 $ 493,365
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6
The following table presents the net realized gains (losses) and the change
in net unrealized gains/losses during the three months ended March 31, 1997 and
1996, respectively.
Three months ended March 31, 1997 Three months ended March 31, 1996
------------------------------------------------ -----------------------------------------------
Change in Change in
Net Realized Net Unrealized Net Realized Net Unrealized
Gains (Losses) Gains/Losses Total Gains (Losses) Gains/Losses Total
-------------- -------------- ---------- -------------- -------------- ---------
Futures Contracts:
Domestic exchanges
Financial $ (92,531) $ 68,456 $ (24,075) $ 88,231 $ 63,393 $ 151,624
Currencies 129,503 (72,150) 57,353 94,593 51,881 146,474
Other 34,803 (75,327) (40,524) (46,494) (33,410) (79,904)
Foreign exchanges
Financial 104,754 23,617 128,371 (105,210) (208,009) (313,219)
Forward Contracts:
Currencies 1,121,139 (311,779) 809,360 (74,231) (53,725) (127,956)
Foreign Currrencies (2,678) (335,575) (338,253) (6,499) (163,622) (170,121)
-------------- -------------- ---------- -------------- -------------- ---------
$1,294,990 $ (702,758) $ 592,232 $ (49,610) $ (343,492) $(393,102)
-------------- -------------- ---------- -------------- -------------- ---------
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D. Subsequent Event
All trading decisions are currently made by John W. Henry & Co., Inc. (the
'Trading Manager'). The Trading Manager has determined that its Yen Financial
Portfolio no longer meets its original investment objectives and therefore,
terminated its Yen Financial Portfolio effective March 31, 1997.
Accordingly, as of April 1, 1997, the General Partner reallocated assets
previously traded pursuant to the Yen Financial Portfolio
(representing approximately 32% of the Partnership's assets) to
the Trading Manager's Original Investment Program.
7
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
(a limited partnership)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on May 12, 1989 with gross proceeds of
$139,151,000. After accounting for organizational and offering costs, the
Partnership's net proceeds were $137,151,000. At the inception of the
Partnership, sixty percent of the net proceeds was allocated to commodities
trading activity and forty percent was placed in reserve and invested in
investment grade interest-bearing obligations ('Reserve Assets'). On June 30,
1994, the Reserve Assets matured and the resulting proceeds were allocated to
commodities trading.
As of March 31, 1997, 100% of the Partnership's net assets were allocated to
commodities trading. A significant portion of the net asset value was held in
U.S. Treasury bills (which represented approximately 77% of the net asset value
prior to redemptions payable) and cash, which are used as margin for the
Partnership's trading in commodities. Inasmuch as the sole business of the
Partnership is to trade in commodities, the Partnership will continue to own
such liquid assets to be used as margin.
The percentage that U.S. Treasury bills bears to the net asset value varies
each day, and from month to month, as the market value of commodity interests
change. The balance of the net asset value is held in cash. All interest earned
on the Partnership's interest-bearing funds is paid to the Partnership.
The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in commodity futures contract prices
during a single day by regulations referred to as 'daily limits.' During a
single day, no trades may be executed at prices beyond the daily limit. Once the
price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its commodity
futures positions.
Since the Partnership's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk). The General Partner attempts to minimize these
risks by requiring the Partnership's trading manager to abide by various trading
limitations and policies. See Note C to the financial statements for a further
discussion on the credit and market risks associated with the Partnership's
futures, forward and options contracts.
Redemptions by limited partners and the general partner recorded for the
three months ended March 31, 1997 were $683,231 and $6,920, respectively, and
from commencement of operations, May 12, 1989, through March 31, 1997 totalled
$138,874,878 and $1,584,005, respectively. Future redemptions will impact the
amount of funds available for investment in commodity contracts in subsequent
periods.
The Partnership does not have, nor does it expect to have, any capital
assets.
The Trading Manager has determined that its Yen Financial Portfolio no longer
meets its original investment objectives and therefore, terminated its
Yen Financial Portfolio effective March 31, 1997. Accordingly, as of
April 1, 1997, the General Partner reallocated assets previously traded
pursuant to the Yen Financial Portfolio (representing approximately 32%
of the Partnership's assets) to the Trading Manager's Original
Investment Program.
Results of Operations
The net asset value per Unit as of March 31, 1997 was $138.39, an increase of
1.00%, from the December 31, 1996 net asset value per Unit of $137.02.
Profits earned in the currency, financial, metal and stock index sectors
drove January's positive performance, while the energy sector incurred losses.
Investors remained focused on economic fundamentals in the currency markets,
which pushed the U.S. dollar to new highs against the Japanese yen. Meanwhile,
intervention by Canada's central bank slowed the year-long rise of the Canadian
dollar against the U.S.
8
dollar. The German mark declined against the U.S. dollar as investors became
cautious in the face of bearish news on the German economy. In Britain,
political realities took their toll on the pound as prospects for an interest
rate hike in Britain weakened, causing the pound to fall. German mark, Japanese
yen, Swiss franc and several European/U.S. dollar cross rate positions posted
gains, while the Partnership incurred losses from British pound positions. In
the financial sector, the U.S. bond markets became choppier, as investors
scrutinized new economic data and comments by Federal Reserve Bank officials as
to indications on the direction of interest rates. In Japan, with Japanese
interest rates at record lows, the Nikkei plummeting and the yen continuing its
long decline against the U.S. dollar, investors looked for signs of government
support or intervention to stem the tide, yet there was little to encourage
them. Positions in German, French, Australian and Japanese bonds were
profitable. In the metal sector, short positions in gold profited as gold prices
continued their relentless decline in the world markets. In the stock index
sector, short Nikkei positions benefited the Partnership as the Japanese stock
market continued its downward trend.
February's flat performance was the result of profits earned in the currency
sector offsetting losses in the metal, financial, energy and stock index
sectors. In the currency sector, British pound, German mark, Swiss franc and
French franc positions were profitable. Despite the best efforts of G-7 nations
to talk the U.S. dollar down from its lofty peaks, defiant market players pushed
the greenback to new highs against the German mark, Japanese yen and Swiss
franc. Later in the month, hints by the U.S. Federal Reserve chairman of a
possible interest rate hike sent the dollar soaring as it seemed the U.S.
currency would retain its high-yield status in the global marketplace. In the
metal sector, gold prices rose as the lowest spot prices since 1993 rekindled
demand. Prices also spiked higher on news that the European Union would not
condone the sale of central bank gold reserves to reduce government budget
deficits. As a result, short positions in gold were unprofitable. In the
financial sector, U.S., Australian and Japanese bond positions posted losses.
Continued speculation on the direction of interest rates fueled volatility in
the global interest rate markets. Early in the month, central banks in Germany,
England and the U.S. announced their intention to keep rates stable, but
speculation continued, as the focus in the U.S. turned immediately to the
Federal Reserve's next policy committee meeting in March.
March's negative performance was the result of losses incurred in the
financial, energy, stock index, soft and grain sectors. Profits were earned in
the currency sector. The metal sector was flat. In the financial sector,
British, French, German and Japanese bond positions posted losses. Opportunities
for gains in global interest rate markets were limited as continued speculation
over the direction of U.S. interest rates produced volatile and trendless
markets. Additionally, U.S. bond markets were buffeted by economic reports
indicating a strengthening economy and a growing conviction that interest rate
hikes would follow. In the energy sector, improving crude oil and natural gas
inventories pushed prices down as positions in heating oil and light crude
resulted in losses. In Europe, renewed speculation about a delay in the European
Union's plans for economic and monetary union pushed the German mark higher
against the U.S. dollar. The mark also realized hefty gains against the British
pound as upcoming general elections in Britain kept the market on edge and
investors took profits in the pound. The largest profits were earned in the
Japanese yen as that currency continued to decline throughout the month,
profiting the Partnership's short positions. The U.S. dollar, which was expected
to benefit from increasing rates in the U.S., was buffeted over the short term
by volatility in stock and bond markets. Positions in the Japanese yen, British
pound and Australian dollar contributed to profits.
Interest income from U.S. Treasury bills decreased by approximately $20,000
for the three months ended March 31, 1997 as compared to the same period in 1996
due to the effect of redemptions on the funds available for investment in U.S.
Treasury bills.
Commissions are calculated on the net asset value on the first day of each
month and, therefore, vary based on monthly trading performance and redemptions.
Commissions decreased by approximately $30,000 for the three months ended March
31, 1997 as compared to the same period in 1996 primarily due to the effect of
redemptions on the monthly net asset values.
Management fees are calculated on the net asset value as of the end of each
month and, therefore, are affected by trading performance and redemptions.
Management fees decreased by approximately $12,000 for the three months ended
March 31, 1997 as compared to the same period in 1996 primarily due to the
effect of redemptions on the monthly net asset values.
9
Incentive fees are based on New High Net Trading Profits generated by the
Trading Manager, as defined in the Advisory Agreement between the Partnership,
the General Partner and the Trading Manager. No incentive fees were earned for
the three months ended March 31, 1997 and 1996.
General and administrative expenses decreased by approximately $6,000 for the
three months ended March 31, 1997 as compared to the same period in 1996. These
expenses include reimbursements of cost incurred by the General Partner on
behalf of the Partnership in addition to accounting, audit, tax and legal fees
as well as printing and postage costs related to reports sent to limited
partners.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings--There are no material legal proceedings pending by or
against the Registrant or the General Partner.
Item 2. Changes in Securities--None
Item 3. Defaults Upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--None
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
4.1 Agreement of Limited Partnership of the Registrant, dated
as of January 26, 1989 as amended and restated as of March
15, 1989. (Incorporated by reference to Exhibits 3.1 and
4.1 to the Registrant's Annual Report on Form 10-K for the
period ended December 31, 1989)
4.2 Subscription Agreement. (Incorporated by
reference to Exhibit 4.2 to the Registrant's
Annual Report on Form 10-K for the period ended
December 31, 1989)
4.3 Request for Redemption. (Incorporated
by reference to Exhibit 4.3 to the
Registrant's Annual Report on Form
10-K for the period ended December 31,
1989)
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K--
No reports on Form 8-K were filed for the period covered by this
report.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Prudential-Bache Capital Return Futures Fund L.P.
By: Seaport Futures Management, Inc.
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: May 15, 1997
----------------------------------------
Steven Carlino
Vice President
Chief Accounting Officer for the Registrant
12